Opinion Making the cut

RBI’s new governor Urjit Patel and its first-ever Monetary Policy Committee (MPC) deserve credit for effecting a 25 basis point cut in the latter’s benchmark repo or overnight lending rate to 6.25 per cent. That the six-member panel voted unanimously in favour lends added credibility to the decision. There were good reasons to justify a rate cut now. The outlook for food inflation is benign on the back of a decent monsoon, which has helped rein in prices of pulses that were a source of considerable worry till recently. Overall, consumer price inflation, at 5.05 per cent in August, is headed southwards and well within the RBI’s target of five per cent by the January-March quarter. That apart, headwinds in the form of slowing global growth and sluggish industrial production coupled with no signs of a private sector-led investment revival, made the case for an interest rate cut a no-brainer. Patel and the MPC — which has the mandate to set policy rates collectively, as opposed to the previous system where that power vested solely with the governor — should be given full marks for a clear decision.

Equally welcome is the commitment to continue with the policy of ensuring adequate liquidity, including through open market bond purchases. This should hopefully now start reflecting in lower rates charged by banks, which hasn’t really happened despite a lowering of the repo rate by 150 basis points since January 2015. Lower rates will benefit banks both by way of improving credit off-take and also the possibility of booking treasury gains on their bond yielding, thereby offsetting losses on bad loans. A transmission mechanism, which appears to be working in the money markets (yields on bonds, commercial paper, etc) but not in respect of bank loans, would worry the central bank. It is encouraging to see Patel make the case for a pragmatic approach to addressing the issue of stressed assets that may be holding banks back.

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The apparent change in the tenor and approach of the central bank under a new governor and the six-person MPC is welcome. The tenures of both Raghuram Rajan and his predecessor D. Subbarao were marked by strained terms of engagement between the RBI and the political executive. Better coordination between monetary and fiscal policy will lead to better outcomes, while enhancing the credibility of both Mint Street and North Block in the eyes of investors.